CFO Blog: Commentary and Opinion

I have worked with CFOs who leave the issue of ethical conduct to the HR and legal functions. But others have taken a different view -- they take a significant interest in ensuring that management and employees always behave in an appropriate fashion, consistent both with laws and regulations and the expectations and standards of the organization. They realize that not only can inappropriate behavior lead to compliance failures, fraud, and theft, but the consequences can adversely affect employee morale and the firm?s reputation. The bottom line is that ethical failures can affect operational and financial performance and share price.

These CFOs engage with HR, legal, and other functions to ensure the company is communicating its standards and expectations, training employees, and providing an effective mechanism for employees and others to report suspected wrongdoing, investigate potential violations, and monitor the ethics program.

The Ethics Resource Center recently a business ethics report, based on a survey of 4,800 employees. I was surprised by some of the statistics and suspect most CFOs will be too:

-45% of employees have witnessed misconduct at work. While this figure is down from 49% in 2009 and 55% in 2007, it is still remarkably high.
-Nearly two-thirds have reported misconduct, the highest level on record. Unfortunately, 22% of those who reported misconduct suffered retaliation as a direct result.
-The number of companies with ?weak ethics cultures? rose from 35% in 2009 to 42% last year. However, 42% said ?their company has increased efforts to raise awareness about ethics.?
-More people (now 13%) are feeling pressure to bend the rules, or even break the law.
-Just over one-third of employees said their managers do not display ethical behavior (up from 24% in 2009). That can have a cascading effect through the organization, resulting in a company of employees who are more likely to violate the code of ethics.

The report recommends that executives:

-Invest in ethics and compliance programs, and view ethics as a business priority.
-Make ethical leadership part of all managers? evaluations. And communicate their personal commitment to ethical conduct.
-Focus on their own behavior, because their actions and responses to reports of misconduct are at the heart of the matter.

I suggest CFOs go further and ask these questions: Is it time to revisit the HR-preferred ?talk to your supervisor? approach to potential problems, and replace it by encouraging employees to report independently of their supervisors? Shouldn?t an ethics program be risk-based, looking at the areas of greatest potential harm, ensuring policies and controls are sound, putting metrics in place, and then monitoring at regular intervals?

I also recommend bringing in internal audit to assess all or part of the program and assure the CFO and the rest of the executive team that the program is meeting expectations.

CFOs cannot, in my opinion, leave the issue of ethics to human resources, legal, compliance, or audit. CFOs can add great value by taking the lead. They should ask the questions that cut to the heart of the ethics program, being alert to any signs of inappropriate behavior, and setting an example for all to follow.

Norman Marks CPA is a vice president with SAP and a long-term internal audit and risk-management practitioner.